In North Dakota, countdown looms for $5.3 billion oil tax break

December 19, 2014

Reuters

BISMARCK, N.D., Dec 19 – Tumbling U.S. oil markets hit an important if obscure milestone on Thursday, closing for the first time at a price that could trigger a $5.3 billion, two-year tax break for North Dakota oil drillers as soon as next summer.

Under a decades-old law, the state at the heart of the U.S. shale oil boom would waive its 6.5 percent oil extraction tax once the average monthly price of benchmark West Texas Intermediate (WTI) crude at Cushing, Oklahoma, falls below a certain threshold for five consecutive months.

For next year, that price is $55.08 per barrel. On Thursday, U.S. crude oil futures settled at $54.11 per barrel, the lowest close since May 2009 and the latest leg of a rout that has halved the price of crude since June.

It is unlikely that the clock would start ticking in December, since the average price is still above $61 a barrel. But if prices remain this low into next year, it could be a reality as soon as next June.

“We’re really at the point where we could start calculating this,” Ryan Rauschenberger, North Dakota’s tax commissioner, said in an interview.

The hope of a future tax break will be cold comfort for North Dakota’s beleaguered oil producers, including Continental Resources Inc and Oasis Petroleum Inc, which plan to spend less money in 2015.

The tax break “would be an important incentive for the industry to continue investing,” said Ron Ness, president of the North Dakota Petroleum Council, an industry trade group.

The potential tax relief could make it difficult to know how much crashing oil prices are hurting the nation’s oil producers. It also would muddy the waters to determine how quickly a slowdown in U.S. production affects a growing global supply glut.

While only about 3 percent of oil taxes go to fund the state’s day-to-day operations, a reduction would wreak havoc with parts of the state’s budget and crimp funding for new schools, water pipelines and other major projects in western oil-producing counties that have made North Dakota the second-largest U.S. oil producer.

Rauschenberger estimates that North Dakota would only take in $2.9 billion in oil taxes in the next two years without the oil extraction tax. With the tax, the projection is $8.2 billion.

SEEN IT BEFORE

The tax break was instituted in 1987, several years after North Dakota’s second oil boom went bust. Oil prices had collapsed after Saudi Arabia flooded the market in a price war with other producers – a scenario some see repeating now.

The break was designed “to try and keep oil production occurring in the state in a low-price environment,” said Rauschenberger, who was appointed tax commissioner last year and elected to a four-year term last month.

From 1987 until 2004, the trigger was in effect, meaning oil extraction tax collections were a pittance compared with, say, this past July, when $325 million in oil taxes rolled into state coffers, the highest monthly amount in history.

Here is how it works.

If the average price of crude is below an inflation-adjusted limit – set at $55.08 per barrel for 2015 – for five consecutive months, then the 6.5 percent oil extraction tax is waived for the first 24 months of a well’s life.

After that 24 months is up, and if the average price of oil is still below $55.08 per barrel, the tax rate rises to 4 percent, not the original 6.5 percent.

The full 6.5 percent oil extraction tax only returns if the average price of oil rises above that $55.08 per barrel threshold each month for a five-month period. The break does not apply to wells already in production, however.

The state still imposes a separate 5 percent gross production tax as a type of property tax on each barrel, no matter what.

But a complete repeal of the 6.5 percent extraction tax would mean North Dakota’s “overall oil tax rate would be effectively cut in half,” Rauschenberger said. (Reporting by Ernest Scheyder; Editing by Jonathan Leff and Lisa Shumaker)

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2 comments

I don’t understand the states point we have close to 800,000 people an they cant seem to give back to us that live here and pay the higher cost of living ect. If spent 20 Million on a school you could build 400 schools. There is enough to go around an give back we don’t have that many citizens in ND. They are making how much interest off that money?? Plus have we forgotten abut our coal, hydro and wing energy, agriculture ect. we have in ND that the state makes money off of. I think we are getting a smoke screen here by getting us to focus on the 5.3 an not the interest an other funds the Government makes money off of, plus all the state tax dollars collected by the state due to all the out of state workers it the tourism of ND.. Motels, restaurants, shopping look at Wal Mart how much revenue they make an pay in taxes.. So the Number is bigger an grows daily due to the boom. We should be doing more to insure it doesn’t stop on the federal level. Don’t buy the Arabs oil boycott there oil who cares cheaper isn’t always better for us here in the states. China is the #1 users of oil an us at #2 so do you think if the two countries lean on OPEC to cut there production back to what it was an use it to control the price to get it at a reasonable 75-80 dollar barrel. Instead they feast while the world suffers they either wont produce enough or too much either way we suffer due to a few Arab countries. The same ones who support terrorist are we saying it is ok they do what they do but we will buy your oil kind of shooting ourselves in the foot right. The state is separating itself from its citizens an don’t want our input, we where ranked the most corrupt state in the union, a lot of greed an only a few who share in its rewards. Give it back its not just for the fews interest it for all of us who have endured the good times and paying the high prices for it, so its only right we share in the rewards. The politicians haven’t figured out how they can get there hands on it. Like I said its a smoke screen that number grows daily an we have the money from other industries also in the mix. They count on the conservative ND people say save it for the pervervial “rainy Day” so the interest can be sucked away by them and the select few who get bids for state work. I think we need to demand a vote for what we want to do with the money or do away with State Tax like TX,WY and other states who have done that. We are getting robbed and we let it happen by not demanding marching to the legislation and our states Attorney is one of the biggest problems, How Many times can he run seriously he should only get two terms an we get a new one same old people are getting rich and the rest who aren’t good old boys don’t. Oasis by the way was kicked out of TX due to there bad environmental practices an ND employs them to drill state wells. Where is that money going??? And of course they are not regulated liie other companies are due to the few greased palms an our Governor is to blame for that. Its all a money maker for a few. Lets wake up an stop being sheep and be lions an get what we are entitled too if it isn’t us it will be some of them. I may sound ignorant to some but its how I see it and some know but cant talk about the “elephant” in the room. It is in the room pooping all over us so I want to say it stinks. I hope some people with way more pull and clout will act on this womeone who knows how too approach this far better than me. Thanks for letting me rant and I hope people aren’t too offended an will stop this corruption now.

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